2023-07-15 02:52:56 ET
Summary
- Jabil, a global manufacturing company, has diversified its operations across high-growth markets such as electric vehicles, healthcare, and renewable energy and is well-positioned to leverage growth opportunities.
- Despite strong financial performance and strategic positioning, Jabil faces risks, including customer concentration, cyclical end-customer demand, and potential macroeconomic headwinds.
- While Jabil's current valuation is high compared to its historical range, its discounted FY2 PEG ratio suggests potential for an attractive investment opportunity.
Jabil (JBL), a global manufacturing powerhouse, has strategically diversified its business operations across a variety of high-growth markets, including electric vehicles, healthcare, renewables, data center, 5G, and more. With a proven track record of strong financial performance and a keen eye on emerging trends such as digital transformation, AI, and renewable energy, Jabil is uniquely positioned to leverage multiple growth opportunities. In this article, we will delve into Jabil's business model, financial trajectory, and strategic positioning while also identifying the potential risks and headwinds investors should consider before making an investment decision.
Business Analysis
Jabil, with its broad industrial footprint, operates as a diversified player across two segments, Diversified Manufacturing Services ((DMS)) and Electronics Manufacturing Services ((EMS)). These segments are comparable in revenue size and cater to a variety of markets, including electric vehicles, healthcare, mobility, renewables, data center, 5G, networking, and capital equipment. By engaging with such a wide range of sectors, Jabil strategically diversifies its risk while simultaneously positioning itself to leverage different growth opportunities.
The company's financial performance has demonstrated strength over the years, reaching a milestone of $33.5 billion in annual revenue in FY22, nearly doubling its earnings from a decade prior. The momentum is expected to continue, driven by the shift to high-growth end markets and the persistent demand for outsourced manufacturing and reshoring. Moreover, consensus estimates seem to undervalue Jabil's near-term fundamental growth.
Taking a closer look at the EMS segment, management anticipates a 2% growth for FY23, equating to around $17 billion in projected revenue. However, considering the consignment model transition with certain customers, the actual growth rate can be adjusted to approximately 6%. This transition, once completed, should ideally accelerate the growth rate of the EMS business.
The implementation of a consignment model does influence revenue recognition, which can seemingly impede revenue growth. In a traditional sales model, revenue is recognized upon product delivery to the customer. However, in a consignment model, Jabil retains ownership of the goods until they are sold by a third-party consignee to the end customer. Therefore, revenue is only recognized when the consignee sells the product, which can delay revenue recognition compared to a traditional sales model.
Strategically, Jabil is well-positioned to capitalize on several emerging secular trends, such as digital transformation, the surge of artificial intelligence ((AI)), the rise of 5G, and the increasing relevance of renewable energy. The company has made substantial headway in data center and cloud services to cater to the growing demand ignited by the proliferation of AI and machine learning applications. Also, being one of the leading producers of 5G radios outside Asia, Jabil asserts a strong foothold in the rapidly expanding 5G market.
In the renewable energy sector, Jabil's significant investments in energy storage, energy conversion, and grid-level power management indicate its anticipation for the sector's continued growth, driven by the worldwide shift towards sustainable energy.
Demonstrating a history of effective execution, management has navigated the company through persistent global supply chain disruptions, maintaining its margins through a pass-through model that shields it against cost increases. It has also exhibited a proactive supply chain management approach, with strategies in place to counter potential future shortages. The company's philosophy of local-for-local production, coupled with its ability to deliver solutions worldwide, offers a competitive edge in the face of ongoing regionalization and reshoring trends, largely brought about by geopolitical and pandemic-related disruptions.
Jabil's consistent efforts to enhance profitability and efficiency over the years, particularly through factory automation and AI workflows, have nudged its margins toward the upper end of the EMS industry range. This progression and a disciplined growth and capital allocation approach signal a sustainable path toward further margin expansion.
Risks
Our analysis identified several key downside risks for investors considering Jabil as an investment opportunity. These risks pertain to the company's revenue growth, customer concentration, end-customer demand cyclicality, execution of new programs, and macroeconomic factors.
Firstly, Jabil's reliance on Apple (AAPL) as a major source of revenue poses a significant risk. Apple accounted for approximately 19% of Jabil's sales in FY22, with Jabil now involved in a wider range of Apple products. Consequently, weak sell-through of Apple products, particularly iPhones, could substantially impact Jabil's financial results. Furthermore, Jabil's revenue concentration is also evident in its top five customers, generating 44% of its revenue, and its top 79 customers account for 90% of revenue in FY22. This customer concentration puts Jabil's revenue and earnings at risk if customers consolidate or reduce purchasing commitments or even terminate their relationships with the company.
Secondly, end-customer demand for Jabil's products can be both cyclical and highly dependent on specific product cycles. As a result, production schedule commitments are typically quite short-term, exposing the company to the risk of sudden shifts in demand. This could lead to fluctuations in revenue and earnings, potentially creating uncertainty for investors.
The third risk factor relates to Jabil's ability to ramp up new programs in key end markets, such as healthcare and cloud services. The company's success in expanding margins and returns depends on its execution of these programs, including its Johnson & Johnson ( JNJ ) medical device business and growing wallet share with key hyperscale data center customers. An inability to successfully execute these programs could undermine our positive outlook on Jabil's growth potential.
Lastly, general macroeconomic weakness, including factors related to tariffs, could pose headwinds to Jabil's demand and financial performance. Macroeconomic factors could impact Jabil's revenue as well as increase costs, ultimately affecting profitability and returns for investors.
Financial & Valuation
Note: All historical data in this section comes from the company's 10-K filings, and all consensus numbers come from FactSet.
In our analysis, we believe JBL's recent performance and financial trends demonstrate promising prospects for investors, although its current valuation gives us pause.
The company reported FY Q3 earnings on 06/15/2023 with revenue growth of 1.8% y/y to $8,475 million , easily surpassing consensus estimates by 3.4%. The stock responded positively, trading up 5.0% the day after earnings were announced. JBL's operating margin also improved, coming in at 4.8% compared to 4.2% a year ago, and its EPS for the quarter increased by 16% y/y to $1.99, beating consensus by 6.1%.
Over the past three fiscal years, JBL's revenue grew at a CAGR of 9.8%, and consensus forecasts suggest continued growth in the coming years, with revenues expected to reach $34.8 billion this fiscal year and $35.8 billion the following fiscal year. The company's EBIT margin increased by 1.1% points during the same period and is projected to expand further in the coming years. Additionally, JBL's management effectively used share repurchases to counter shareholder dilution, resulting in a 15.0% decrease in diluted outstanding common shares during the past three years.
We are particularly bullish on JBL's free cash flow ((FCF)) growth. Consensus estimates indicate that FCF for this fiscal year will reach $978 million, a 2.8% FCF margin, compared to $424 million, a 1.7% FCF margin, four fiscal years ago. Over the past four completed fiscal years, the company generated an average FCF margin of 2.0%, showing a positive trend in cash generation. With capex representing an average of 3.9% of revenue, JBL's business exhibits moderate capital intensity. The company's strong return on invested capital at 17.8% further supports our positive outlook.
Despite JBL's impressive performance, returning 96% points more than the S&P 500, or 115.1% in absolute return, the stock's current dividend yield of 0.3% lags behind the S&P 500 by 117 bps. However, JBL's FY2 PEG ratio of 0.6, compared to the S&P 500's PEG ratio of 1.5, represents a significant discount of 61.5%, potentially making it an attractive investment opportunity.
Looking at historical valuations, JBL is currently trading at a forward 12-month P/E of 12.1, which is higher than its 5-year mean of 9.2 and above the 2-standard deviation range of 7.0 to 11.4. This suggests that the stock is trading at a historically high valuation relative to its 5-year range. In comparison, its peer FLEX is trading at a forward 12-month P/E of 11.1.
Conclusion
Jabil offers a promising investment opportunity, courtesy of its diversified business model, robust financial performance, and ability to capitalize on emerging trends such as digital transformation, AI, 5G, and renewable energy. The company's proactive approach to supply chain management and local-for-local production philosophy provides a competitive edge in an increasingly regionalized and reshored world.
However, investors must weigh the downside risks tied to customer concentration, cyclical end-customer demand, execution of new programs, and macroeconomic factors. While Jabil's current valuation might seem high compared to its historical range, its discounted FY2 PEG ratio compared to the broader market suggests potential for an attractive investment opportunity. Ultimately, investors should carefully evaluate both the potential rewards and risks associated with Jabil before making an investment decision.
For further details see:
Unleashing Jabil's Potential: How Diversification And Innovation Drive Future Growth